IR35 Explained for UK Contractors and Freelancers
IR35 is the set of rules that decides whether a contractor working through their own limited company should be taxed more like an employee. The off-payroll working rules shift who makes that call, and getting it wrong can be expensive for everyone involved. This explainer walks you through who is affected, who decides, how a status assessment works and what you can do to keep each contract on a clear footing. It is general information, not tax or legal advice, so check GOV.UK or speak to an accountant or employment status specialist about your own contracts.
Key takeaways
- IR35 and the off-payroll working rules apply when you work through your own intermediary, usually a limited company, and would be an employee if the client engaged you directly.
- Public sector clients and medium or large private sector clients decide your status and should give you a status determination statement.
- For small private sector clients, your own company is responsible for deciding.
- Status is decided contract by contract, based on how the work really happens, not just what the paperwork says.
- HMRC's CEST tool helps, but it is a starting point, not the end of your thinking.
If you are a sole trader invoicing clients directly, IR35 does not apply to you in the same way, because there is no intermediary between you and the client. Your employment status still matters, but the rules covered here are aimed at people who supply their services through a company. That is why the topic comes up so often among IT contractors, consultants, engineers, project managers and other specialists who set up a limited company to work on day-rate contracts.
The idea behind the rules is simple. If you would be an employee were it not for your company sitting in the middle, the tax system wants you taxed in a way that broadly matches an employee. The detail is where it gets difficult, so it helps to break it down.
What IR35 and the off-payroll rules actually are
IR35 is the informal name for legislation aimed at "disguised employment." It looks at contractors who provide their services through an intermediary, most often a limited company the contractor owns and runs, sometimes called a personal service company. If the working relationship would count as employment had the client hired the contractor directly, the engagement falls inside the rules.
The off-payroll working rules are the more recent version of this regime. They do not change the basic test of whether you would be an employee. What they change is who decides and who deals with the tax when the rules apply.
Inside versus outside
You will hear contractors talk about being "inside IR35" or "outside IR35." Inside means the rules apply to that contract, so the fees are treated broadly like employment income for tax and National Insurance purposes. Outside means the rules do not apply, and your company is paid and taxed as an independent business in the normal way.
The financial difference can be significant, which is why both clients and contractors pay close attention to the outcome. It is also why the rules attract so much advice, some of it reliable and some of it not.
Pro tip
Think of status as a description of the relationship rather than a label you choose. You cannot opt out of IR35 by writing "this contract is outside IR35" in the agreement. What matters is how the work is set up and how it actually happens day to day.
Who decides your status
This is the part of the off-payroll rules that changed the market most. Responsibility depends on the type and size of the client you work for.
| Client type | Who decides status | What you should receive |
|---|---|---|
| Public sector body | The client | A status determination statement with reasons |
| Medium or large private sector business | The client | A status determination statement with reasons |
| Small private sector business | Your own limited company | No statement from the client; you make and record the assessment |
Whether a private sector client counts as small depends on official size tests. Those thresholds are set out on GOV.UK and can change, so ask the client directly whether they consider themselves small for these purposes, and keep their answer on file.
The status determination statement
When the client is responsible, it should take reasonable care in deciding your status and give you a status determination statement explaining the conclusion and the reasons for it. If you disagree, there is a process to challenge the decision with the client. Read the reasoning carefully. A statement that simply says "inside" with no explanation of how the work is controlled, or that seems to describe a different role, is worth questioning politely and in writing.
When your company decides
With a small private sector client, your company carries the responsibility. That means you should actually assess each contract, record what you looked at and why you reached your conclusion, and revisit it if the work changes. A neat file of assessments is far more convincing than a decision you cannot explain later.
The factors that point inside or outside
Employment status is decided by looking at the whole picture. No single factor settles it, but some features come up again and again when status is assessed.
Features that tend to suggest outside
- You decide how the work is done, within the agreed outcome
- You have a genuine right to send a suitable substitute, and the client cannot simply refuse
- You are engaged for a defined project or deliverable, not an open role
- You bear business risk, such as fixing defects at your own cost
- You use your own equipment and work for several clients over time
Features that tend to suggest inside
- The client controls what you do, how, when and where, like a manager would
- You must do the work personally with no realistic substitution
- You are moved between tasks as the client needs, like staff
- You are integrated into the team, with line management and staff perks
- The engagement rolls on indefinitely with the same client
Three themes sit underneath most assessments: control (who decides how the work is done), personal service (whether you must do the work yourself) and mutuality of obligation (whether there is an ongoing duty to offer and accept work). Other factors, such as financial risk and whether you are in business on your own account, help fill in the picture.
Using HMRC's CEST tool
CEST stands for Check Employment Status for Tax. It is HMRC's free online tool that asks a series of questions about an engagement and gives a view on whether the off-payroll rules apply. Many clients use it as part of their decision, and you can use it too.
- Gather the facts first. Have the contract, the statement of work and a clear idea of how the work will really be done before you start.
- Answer based on reality. Describe what actually happens, or will happen, not what you would like the answers to be. Inaccurate answers make the result unreliable.
- Save the result. Keep a copy or record of the outcome along with the answers you gave and the date.
- Note anything the tool did not capture. If there are important features of the engagement that the questions did not cover, write them down alongside the result.
- Repeat when things change. A new scope, a contract extension or a shift in how you are managed is a reason to run it again.
Some contracts produce an "unable to determine" result. That is not a verdict either way. It is a signal to look more closely, perhaps with help from someone who specializes in employment status.
Common mistake
Running CEST once at the start of a long engagement and never looking again. Contracts drift. A project that began as a defined deliverable can turn into you managing staff and covering a permanent role. If the reality changes, the original assessment may no longer describe your situation.
What happens when a contract is inside
When the client decides a contract is inside the rules, the party that pays your company, often the client or an agency in the chain, is generally responsible for deducting tax and National Insurance before paying your company. Your company then receives a net amount for that contract.
That has knock-on effects for how you run your company. You need to account for income that has already been taxed, and you may find that the usual benefits of operating through a limited company are much smaller for that contract. Talk to your accountant about how to record and report inside payments properly so nothing is taxed twice or missed.
Some contractors who find most of their work is inside the rules choose to work through an umbrella company instead, which employs them and runs PAYE. The off-payroll rules are unlikely to apply if you are employed by an umbrella company, because the umbrella is your employer. That route has its own trade-offs, which we compare in a separate guide.
Example
Imagine a contractor called Priya who runs her own limited company. A large retailer offers her a six-month contract to deliver a defined data migration. She agrees the outcome, chooses her own methods and tools, and the contract gives a genuine right to send a qualified substitute. The retailer assesses the role and issues a status determination statement saying the engagement is outside. Halfway through, the retailer asks her to start managing two permanent staff and covering a team lead's duties. Priya flags the change in writing and asks the client to review the determination, because the work now looks different from what was assessed.
How to protect yourself on every contract
You cannot control every outcome, but you can make sure decisions are based on accurate facts and that you have a clear record. That helps whether the client decides or your company does.
Before you sign
Ask early who will decide status and when you will receive the determination. Read the contract and statement of work with status in mind: is it about a defined deliverable or an open-ended role? Does it allow substitution? Who controls how the work is done? Raise anything that does not match how you will actually work.
While the work is running
Keep the relationship consistent with the contract. Invoice through your company, use your own equipment where it makes sense, and avoid drifting into the role of a permanent team member. Keep a short note of any changes in scope or management and raise them promptly.
At renewals and extensions
Treat every extension or new statement of work as a fresh contract for status purposes. Ask whether the determination has been reviewed and request a new statement if the work has changed.
Your IR35 checklist
- Confirm whether the client is public sector, medium or large, or small
- Ask who will decide status and request the status determination statement in writing
- Read the contract and statement of work for control, substitution and scope
- Run HMRC's CEST tool using accurate answers and save the result
- Keep a file per contract with the determination, your notes and any correspondence
- Flag changes in how you work and ask for a review when they happen
- Speak to an accountant or status specialist if the outcome is unclear or disputed
Frequently asked questions
Does IR35 apply to sole traders?
IR35 and the off-payroll working rules are aimed at people who work through an intermediary such as their own limited company. A sole trader contracting directly with clients has no intermediary, although employment status still matters and a client may still consider whether you should really be on their payroll.
Can I choose to be outside IR35 by writing it into my contract?
No. A clause stating the contract is outside does not decide the question. Status depends on the overall relationship, including how the work is actually carried out. A well-drafted contract helps only if it reflects reality.
What can I do if I disagree with the client's determination?
Where the client is responsible, there is a process for challenging a status determination with them. Put your reasons in writing, explain which facts you think were misunderstood and keep copies of everything. If it remains unresolved, consider getting specialist advice.
Is a CEST result binding?
CEST gives HMRC's view based on the answers provided. It is only as good as the information you enter, and it does not replace careful thought about the whole relationship. Keep the result as part of your records rather than treating it as the final word.
Related reading
The bottom line
IR35 comes down to one question: would you be an employee if your company were not in the middle? The off-payroll rules mostly change who answers that question. Know which type of client you are dealing with, get the determination in writing, assess each contract honestly and keep good records as the work evolves.
This is general information, not tax or legal advice. The rules and official guidance change, so check the latest on GOV.UK and HMRC, and speak to an accountant or employment status specialist before relying on a decision for a valuable contract.
